FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
“TOSHKENT” REPUBLICAN STOCK EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
With Islam Karimov's second presidential
term due to expire in December 2007, the
question of who is to succeed him will
increasingly dominate the domestic political
scene during the forecast period.
Mr. Karimov has ruled the country for 18
years, first as head of the Soviet republic's
Communist Party, and then as president of
independent Uzbekistan. Uzbekistan's
opposition groups will remain too weak in
2006-07 to mobilise a mass civil movement
against the authorities. Nevertheless, the
risk of popular unrest is high, as social and
economic grievances are likely to mount.
The authorities will act swiftly, and with force
when necessary, to quell such protests.
Although measures such as these will
probably ensure that Mr. Karimov sees out
his term in office, his position is not
impregnable. A small risk to his continued
tenure comes from the possibility that
discontent could build up within the political
elite, if it were to judge that Mr. Karimov was
no longer capable of protecting its interests.
Pressure on the president to make way for
an alternative leader could then render his
position untenable, resulting in his ouster by
a rival from within the political hierarchy.
Uzbekistan's relations with Russia and
China will continue to strengthen over the
forecast period, but ties with the West will
deteriorate. Neither Russia nor China shares
the West's concerns over the lack of
democracy in Uzbekistan, and the three
countries will continue to find common
cause in their respective campaigns against
Islamist extremism. Growing economic links
will also give Russia and China a stake in
maintaining stability in Uzbekistan.
The support of these countries will be
useful in political terms for Mr. Karimov, but
is unlikely to translate into more concrete
aid to him personally–in the form of military
assistance, for example–in the event that he
comes under pressure from within the
political elite to resign.
However, the government's failure to
implement substantive reforms will preclude
stronger growth in the agricultural sector.
On the expenditure side, wage and
payments increases are likely to stimulate
domestic demand, although the effect will
be inhibited by the government's tendency
to run up arrears. High tariffs and
restrictions on access to foreign currency
will limit growth in consumer goods imports,
but purchases of capital goods will remain
sizeable, reflecting the undeveloped state of
much of the domestic manufacturing sector.
The World Bank has become the latest
multilateral financial institution to downgrade
its program in Uzbekistan: in mid-March it
announced that it was suspending lending
to the country, but that it would continue to
offer technical assistance. Although not
explicitly stated, concerns at the way in
which the loans were used appear to have
motivated the suspension. The World Bank's
decision reduces the already limited
influence that the international financial
institutions have over the Uzbek government
in terms of promoting reform. Large, albeit
narrowing, trade and current account
surpluses, in conjunction with investment
from Russia and China, will allow the
government to avoid economic reforms.
Instead, it will retain a plethora of
regulations on private-sector activity,
including currency controls and high tariffs
on imports–measures that in the past two
years have sometimes sparked protests.
A loosening of monetary policy, driven in
part by large public-sector wage rises,
contributed to an acceleration in inflation in
2005, when the official year-end rate was
7.8%, up from 3.7% in 2004. Increases in
utility tariffs and in public-sector salaries are
likely to exert further upward pressure on
prices in 2006-07, pushing inflation to about
10% by end-2007.
The som depreciated against the US dollar
by about 11% in nominal terms in 2005,
to end the year at Som1,180:US$1.
The loosening of monetary and fiscal
policies is expected to result in a slightly
more rapid pace of depreciation over the
forecast period, bringing the exchange rate
down to about Som1,460:US$1 by end-
2007. The accelerating rate of nominal
depreciation will ensure that the currency
continues to weaken in real terms, despite
the pick-up in inflation.
Economic Performance
New investment into Uzbekistan's
hydrocarbons and telecommunications
sectors will provide the main impetus to
economic growth in 2006-07, when annual
average growth rate of just over 6% is
expected. New gold-mining projects will
also support economic expansion.
* Economic Intelligence Unit Ltd., July 2006
Key Information Contacts
State Property Committee www.spc.gov.uz
Ministry of Finance www.mf.uz/eng
National Bank of Uzbekistan http://eng.nbu.com/about/history/index.php
State Central Securities Depository www.deponet.uz/english.shtml
Portal of the State Authority www.gov.uz/en/
2003-ORIGINS OF GROSS DOMESTIC PRODUCT (%)
Services
Industry
2003-COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Agriculture & forestry
Private consumption
Public consumption
Gross fixed investment
Exports of goods & services
Imports of goods & services
60
33.2
54.8
50
44.2
37.9
40
31.1
30
22.6
20
10
0
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